How do the rich use charities to minimize their tax?

Question

You hear a lot about how “the rich” are using charities to effectively reduce their tax to minimal amounts, among other methods.
On the face of it without digging, it obviously makes people angry and detest the rich. But scratching beneath the surface, I’m not quite sure how exactly they would achieve this? In order to claim the tax back from money donated, you still have to… donate money? Which would still equal more than the money claimed back from tax.

So unless they are actually doing something illegal and funneling money through a charity, claiming tax, and then using that money from the charity to fund purchases not related to the charities mission, how exactly is it benefiting the donor (financially)?

In: Economics

Answer 1

A common way is that the rich person sets up a charitable foundation that they have sole control over. All the foundation does is (supposedly) distribute money and other assets to other charities in the form of donations. Rarely does the foundation engage in any charitable activities itself. Effectively, its a charity in name only. So the rich person donates money to their charitable foundation. Or they donate stock or other assets to the foundation. They deduct from their taxes the money or the “value” of the assets which they can likely inflate for their tax deduction.

The foundation might hold on to the money or other assets for decades and never really distribute them to other charities. Meanwhile the rich person – as the sole person with control of the foundation – maintains control over that money and those assets. They can’t ever spend the money directly on themselves without theoretically getting into huge trouble, but simply controlling it it gives them influence. And of course if the foundation owns stock it would have the voting rights to that stock and with the rich person being in sole control of the foundation, he has sole control of those voting rights. The money earns interest, the assets might appreciate, and meanwhile no one is paying any taxes on any of it.

And then of course you’ve got these foundations employing people like the rich person’s friends and paying them a salary that’s probably completely out of line with any actual work they may actually be doing for the foundation. And by “people” we can include the rich person’s family and even the rich person his or her self – after all, aren’t they entitled to be compensated for all the “work” they’re doing for the foundation?